Firm Size and Growth in the United Kingdom Life Insurance Industry

The proposition first put forward by Gibrat (1931) that the growth rates of firms are independent of their size has been the subject of many studies published in the industrial economics literature over the last decade or so (Chesher, 1979; Cabral, 1995; Evans, 1987; Hall, 1987; Harhoff, Stahl and Woywode, 1998). The overall conclusion arising from most of the prior research is that corporate growth rates tend to vary randomly across firms and over time, as predicted by Gibrat’s Law of Proportionate Effects (Geroski, Machin and Waters, 1997).

However, to our knowledge, prior research has not investigated whether corporate growth rates in insurance markets follow the Gibrat process. This is surprising given that insurance markets in developed economies such as the United Kingdom (UK) (Richards and Colenutt, 1975; Carter, 1998) and the United States (US) (Globerman, 1986) have long been characterised by rapid market change, dynamic corporate growth and innovative product development.

Therefore, in the present study we seek to address this dearth of empirical research by using 1987-1996 data from the UK life insurance industry to test whether the growth of life insurance companies follows the Gibrat process and, more generally, to investigate the determinants of the growth of life insurance companies. Our research is motivated in four further respects. First, the question of whether small life insurers grow as fast (or faster) than large life insurers is an issue of some importance to policymakers and industry regulators.

For example, insights into the relation between corporate growth and firm size could help policy-makers to frame rules that achieve desired objectives in policy areas, such as the licensing of new entrants to the market and employment creation. Second, the structure and evolution of the insurance industry will be of interest to the distributors and consumers of insurance products. For example, evidence suggesting a lack of an empirical linkage between the past performance and future growth of life insurance companies is likely to influence the decision-making behaviour of brokers, policyholders and investors.

Third, the UK life insurance industry is characterised by a wide range of firm sizes which provides a rich source of data to test Gibrat’s Law. Some prior empirical studies (e.g. Fields, 1988, Hardwick, 1997) have reported that in the insurance industry the returns to scale for small firms is greater than for large firms, suggesting that small operatives will either grow or exit the market.

Therefore, we contribute to the literature by ascertaining whether there is a link between unexploited economies of scale and the growth of life insurance companies. We also investigate the possibility of a link between X-inefficiency and firm growth. Fourth, by focusing on a single market and country, our study avoids the potentially confounding effects that different regulations and market conditions could have in cross-sectional/cross-border studies.

For example, Harhoff et al (1998) report that different tax regimes can significantly influence the rate of corporate investment and firm growth. Accordingly, we can perform a more refined test of Gibrat’s Law.

The remainder of our paper is structured in the following manner. The next section provides background information on the growth and development of the UK life insurance industry. Section 3 describes the Gibrat process and discusses other possible determinants of firm growth. Section 4 outlines the nature of the empirical study, explains the variables and sources of data and presents and discusses the results. The final section concludes the paper.